“Until we bring inflation down — our objective is to bring it down to lower levels — there will be a certain amount of depreciation (of the rupee), which is necessary to ensure that we don’t become uncompetitive,” Rajan said, addressing an event organised by Federal Bank to commemorate the 14th memorial of its founder KP Hormis here.
The Governor, however, said the intent of RBI is not to depreciate the rupee in a steady manner.
“Our focus is on bringing down inflation so that people will not have to ask why the rupee is weakening,” the Governor said.
“If you look at the real effective exchange rate, it (rupee) is flat. In other words, we haven’t really depreciated in real terms against the global currencies. We have been very very flat over the last couple of years.
“The bottomline is don’t just look at the dollar, but remember we are a country of high inflation. Elsewhere, they have deflation or 1 per cent interest rate, which itself is very high there. We have inflation of 5-6 per cent… yesterday, CPI came out at 5.69 per cent,” Rajan explained.
On Thursday, the rupee had hit a fresh 29-month low of 68.30, which is close to the lowest level it had touched on August 28, 2013 at 68.85. It recovered 7 paise yesterday.
The rupee pain follows massive pullout by foreign investors from the country since the beginning of the year. While FPIs have pulled out over Rs 83,000 crore from the domestic market, mostly equities, they pulled back over Rs 23,000 core in the first 11 days of this month.
The funds outflow started after the US Fed increased its lending rates by 0.25 per cent after seven years of near negative interest rates that followed the 2008 global financial crisis.
The woes in the global financial markets are also driven by the troubles in the Chinese economy, which has decelerated to 6.7 per cent last year, the lowest in 25 years. This has pulled down the crude and commodity prices by over 70 per cent.
Similarly, the benchmark Sensex crashed 807 points to drop below 23,000-mark on Thursday, its lowest level in 21 months, on concerns over global economy and mounting bad loans as also weak quarterly earnings of state-owned banks. So far this year, the Sensex has lost over 12 per cent and over 23.5 per cent from its life-time high of 30,028 points in early 2015.